Is Prime Trust, a large cryptocurrency custodian, close to bankruptcy? Will the cryptocurrency market be hit hard again?
Is Prime Trust, a major cryptocurrency custodian, possibly heading towards bankruptcy? Will this lead to another market downturn?
Author: Mia, ChainCatcher
Another major cryptocurrency custodian is on the brink of bankruptcy – Prime Trust, which has been favored by well-known cryptocurrency companies such as Binance.US, FTX, and Celsius to store assets and provide banking services, is now in a situation of “insolvency” or may be taken over by regulatory authorities.
Today, DB NEWSWIRE revealed on its social media that the Financial Institutions Division (FID) of the state of Nevada in the United States stated that Prime Trust lost access to its old wallets as early as 2021 and misappropriated customer assets to repurchase cryptocurrencies. Prime Trust owes customers $85.67 million in fiat currency and $69.509 million in digital currency, but currently only holds $2.904 million in fiat and $68.648 million in cryptocurrency.
The news has caused quite a stir. As one of the custodial cryptocurrency giants, Prime Trust has been secretly misappropriating customer funds since 2021. It should be noted that Prime Trust has had business dealings with FTX, Celsius, and others, which is alarming.
On June 23, FID issued a cease and desist order to Prime Trust, ordering it to stop all activities that violate Nevada state regulations, claiming that the company’s “overall financial situation has deteriorated significantly,” and that it is operating at a huge deficit and may even be insolvent.
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Currently, FID has requested the appointment of a receiver to take over the company’s daily operations and thoroughly examine its financial situation to determine the best choice for Prime customers, either to rectify and return the company to private management or to liquidate it.
In response to the previous cease and desist order, stablecoin TrueUSD, one of Prime Trust’s custodial clients, immediately responded: its stablecoin TUSD funds are still safe, TrueUSD has no risk exposure to Prime Trust, is not affected by this situation, and all user funds are safe. As early as the 10th of this month, TrueUSD issued a statement announcing that it has temporarily suspended minting through Prime Trust.
In addition, earlier this month, cryptocurrency custodian BitGo reached a preliminary agreement to acquire Prime Trust. This undoubtedly brought a glimmer of life to Prime Trust in trouble. However, just 12 days after the announcement, BitGo suddenly announced the termination of the acquisition. Undoubtedly, Prime Trust’s last hope of survival was cut off.
Today, Coinbase product manager Conor Grogan also revealed on social media that, according to Arkham data, Prime Trust’s wallet holds a total of 69.71 million US dollars in digital assets, of which the holding of AUDIO is 61.51 million US dollars, accounting for 88% of its digital currency assets. As we all know, AUDIO is one of the tokens in the FTX system. At its peak, the price of the token once climbed to $4.4, but now it has fallen to $0.18, a decrease of 24 times, which may be closely related to Prime Trust’s impending collapse.
All these big and small events have quietly happened in June, and everything seems to be accelerating the collapse of this cryptographic “building”.
So, what led to the former glory of Prime Trust falling into such a situation? Is it the butterfly effect after the bankruptcy of FTX, or poor internal management of the company? What will be the last straw that breaks the camel’s back? And what will happen to the stablecoin TUSD, which Prime Trust was responsible for hosting?
The Beginning and End of Prime Trust’s Impending Bankruptcy
Prime Trust was founded in 2016 and is headquartered in Las Vegas, Nevada. At first, it was not a company that provided cryptographic services. Initially focused on custody agents, it held funds for early-stage corporate financing. In 2018, Prime Trust turned to cryptocurrencies and agreed to hold US dollar reserves for TrustToken, the issuer of TrueUSD stablecoin. Prime Trust promotes innovation in the digital economy by providing financial infrastructure to fintech and digital asset innovators. Its main business covers token and fiat currency custody, fund processing, anti-money laundering, know-your-customer compliance, and trading technology services.
Prime Trust’s founder and first CEO, Scott Purcell, resigned at the beginning of 2021. Since then, Prime Trust has been taken over by Tom Blockinggeler and was dismissed at the end of last year, and Jor Law served as interim CEO. The flow of CEOs also seems to suggest that there have been some internal issues with Prime Trust’s operations.
In fact, with the strong rebound of Bitcoin in 2021, Prime Trust’s cryptographic business has also flourished. Prime Trust revealed at the end-of-year press conference in 2021 that the company added hundreds of new accounts this year and the total assets under custody almost doubled.
According to RootData, Prime Trust raised a total of $63.98 million in Series A funding in July 2021, led by Traverse, the growth stock fund of Mercato Blockingrtners, with participation from Samsung Next, Kraken Ventures, and Seven Peaks Ventures. In June of the following year, Prime Trust announced the completion of a $107 million Series B funding round. The two rounds of financing raised more than $170 million, and the fact that they are now “insolvent” less than a year later suggests that their operations may have serious problems. Scott Purcel, the founder of Prime Trust, revealed in an interview that internal management began to deteriorate after he left the company, and although they received a lot of money from investors, they achieved little results.
As the rebound of cryptocurrencies subsided, Celsius Network, a cryptocurrency lending platform, and FTX, a cryptocurrency exchange, both of which are Prime Trust clients, filed for bankruptcy in the second half of 2022. In August 2022, Celsius sued Prime Trust, attempting to recover over $17 million in cryptocurrency held by the latter. Celsius claimed that when the two parties terminated their agreement in June 2021, although Prime Trust had returned $119 million worth of cryptocurrency assets to Celsius, it still refused to fulfill its obligation to transfer 398 BTC, 196,268 CEL tokens, 3740 ETH, and 2.2 million USDC. However, Prime Trust agreed to return the assets at a subsequent bankruptcy hearing.
A bigger blow followed, as FTX’s cryptocurrency empire collapsed and Prime Trust was also caught up in the scandal. It is reported that FTX US once held dollar reserves in Prime Trust, and there were also personal financial dealings between Prime Trust and FTX executives. It was revealed that FTX founder SBF had made donations to a political action committee through Prime Trust, and the source of Prime Trust’s previous $500,000 donation to the State Democratic Party was traced back to former FTX executive Nishad Singh.
The bankruptcy of one big client after another has put Prime Trust in a difficult situation. In order to reduce operating costs, Prime Trust laid off a third of its employees at the beginning of this year and stopped all operations in Texas.
In fact, as a custodian, Prime Trust was supposed to be a relatively safe part of the financial system and not engage in high-risk activities. As an intermediary, Prime Trust helped digital asset companies place cash in the banking network and became an important partner for digital asset companies that could not directly enter the banking system. Therefore, when Silvergate and Signature Bank collapsed, Binance.US chose to hold client funds through Prime Trust in April of this year and entrusted its client funds to Prime Trust for custody.
However, earlier this month, the SEC sued Binance.US and sought to freeze assets related to Binance.US’s holding and operating companies, BAM Management US Holdings and BAM Trading Services. Prime Trust lost another important customer.
On the 14th of this month, Prime Trust’s subsidiary banq applied for bankruptcy protection to the bankruptcy court in Nevada, with assets of about $17.72 million and liabilities of $4.5 million, according to the bankruptcy filing. Meanwhile, Abra, Prime Trust’s crypto customer, has also been accused of “securities fraud” by the Texas Securities Commission, claiming that it has been bankrupt or near bankruptcy for months.
Subsequently, FID officially took action against Prime Trust on the 23rd of this month. BitGo, a cryptocurrency custodian, also announced its withdrawal from the provisional agreement to acquire Prime Trust, possibly due to the stop order.
After being abandoned by regulatory authorities and potential acquirers, Prime Trust, which was once in its heyday, has gradually come to the brink of bankruptcy. Currently, the company has suspended all cash and cryptocurrency deposits and withdrawals, facing the risk of bankruptcy liquidation. In addition, crypto companies that have placed their assets in Prime Trust are also facing uncertain risks and futures.
Prime Trust’s sudden closure triggers a chain reaction
Prime Trust’s sudden closure has also caused ripples among its customer base. If Prime Trust really cannot escape the fate of bankruptcy, crypto companies related to it will also not be spared.
Securitize, a blockchain company that saves investor cash deposits for Prime Trust’s trading platform, said that some functions are currently suspended, and it will transition to a new custodian as soon as possible and ensure customer safety; Estonian crypto exchange Coinmetro also officially stated on its social media platform that due to Prime Trust’s suspension of deposits and withdrawals, it is currently unable to process new dollar transactions.
In addition, Swan Bitcoin, a financial advisory platform service company, listed Prime Trust as a custodian and listed all tokens on the TradeFi financial advisory platform as being held by Prime Trust. Swan Bitcoin has revealed that it plans to terminate the agreement with Prime Trust.
Although Prime Trust has not disclosed its specific custody amount publicly, official information shows that Prime Trust’s custodial services cover a wide range of financial and technology industries, including but not limited to digital asset exchanges Bitstamp, Bittrex Global, OKCoin, Zilliqa, etc.; securities issuance platforms Securitize, Harbor, SeriesOne, etc.; real estate investment platforms RealBlocks, Elevated Returns, etc. If Prime Trust fails to fulfill its custody responsibilities, customers’ assets may be damaged or frozen. In addition, if Prime Trust goes bankrupt, its customers may not be able to continue to use its custody services.
In addition, if Prime Trust were to go bankrupt, FDIC insurance, which is regulated by the Federal Deposit Insurance Corporation (FDIC) and the Nevada Financial Services Bureau, may provide protection for customers, with a maximum insurance amount of $250,000 per customer.
Will TUSD (TrueUSD) be affected?
After Prime Trust suspended deposits and withdrawals, TrueUSD notified customers with associated accounts with Prime Trust in an email that they would not be able to mint or redeem the stablecoin TUSD during Prime Trust’s operational pause. Following Binance’s strong promotion of the project on its platform, TrueUSD went from being an unknown stablecoin project to being in the mainstream, with its market share rapidly growing. According to Coinmarketcap data as of the time of writing, the total issuance of TUSD is nearly $3.14 billion.
TrueUSD is a stablecoin issued by TrustToken on the Ethereum and Binance Smart Chain. Holders can mint the same amount of TUSD by depositing dollars, and can also redeem TUSD for dollars at any time. The deposited dollars are kept in different bank accounts and are supervised and audited by third-party institutions, while the initial reserve of dollars behind TrueUSD was held in custody by Prime Trust. However, TrustToken has now established partnerships with other custodians to reduce the risk of TUSD in the event of a single custodian’s bankruptcy.
Previously, TUSD encountered FUD due to the suspension of Prime Trust’s minting of TUSD, causing a brief decoupling, but TrueUSD quickly responded on social media that “TUSD’s minting and redemption services are not affected and will continue to operate as usual,” and TUSD’s price quickly returned to normal.
In the recent fluctuations of Prime Trust’s suspension of acquisition by BitGo, regulatory review by Nevada regulators, and suspension of deposits and withdrawals, TUSD does not seem to have been affected. TrueUSD clarified once again that it will maintain multiple channels for minting and redeeming dollars.
Today, according to the reserve report, TUSD holds $26,434 in funds at a U.S. depository institution that has been ordered to stop withdrawals, of which $26,269 is related to customer withdrawals and token redemptions, but there is no specific indication of which U.S. institutions the funds are held in. We can safely assume that this institution is most likely Prime Trust, and such a small amount of funds held is negligible compared to the total issuance of TUSD of $3.13 billion.
At present, the size of the exposure cannot be determined. Although TUSD has previously stated that there is “no exposure” to Prime Trust, if Prime Trust applies for bankruptcy protection, the most likely impact will be on the issuance of TUSD. Secondly, the process of exchanging TUSD for US dollars or other currencies may be restricted or delayed, causing inconvenience to users holding TUSD. Additionally, if the issuance of TUSD is restricted or the exchange process is delayed, it may increase the market’s uncertainty about TUSD, leading to price fluctuations.
Although Prime Trust is stepping closer to the abyss, it has not affected the development of TUSD. On the contrary, in the week before Bitcoin broke through the $30,000 mark, TUSD’s supply increased from slightly over $2 billion on June 14 to $3.13 billion on June 21, an increase of 56.5%.
After experiencing the bankruptcy year of FTX in 2022 to the collapse of Silvergate and Signature Bank and the SEC lawsuits of Binance and Coinbase in the crypto industry this year, major crypto companies have quietly enhanced their ability to resist risks and prepared for “black swan events” at all times.
Prime Trust is still on the brink of bankruptcy. Currently, the official has not commented on this matter yet, but its credibility in the crypto industry has obviously dropped to the “freezing point”. Whether there are still industry institutions that can throw an olive branch at this moment to save it from the dilemma, or whether another small incident will become the last straw that crushes the camel?